AI-Powered Efficiency Reinforces China's Dominance in Global Supply Chains

Economic

Summary:

China's aggressive integration of artificial intelligence and robotics into its manufacturing sector is widening its competitive edge in global supply chains..

AI Integration as a Strategic Catalyst in Chinese Manufacturing

The integration of artificial intelligence into Chinese supply chains is no longer a futuristic ambition — it is already reshaping the country’s manufacturing landscape. As trade tensions prompt global firms to reconsider their sourcing strategies, China’s rapid embrace of AI, automation, and digitalization is creating a new competitive barrier: technologically superior supply chains that are faster, more precise, and increasingly self-reliant.

This shift is not anecdotal. Beijing’s recent Action Plan for Digital Supply Chain Development by 2030 outlines a national roadmap to embed AI, blockchain, and digital platforms into both manufacturing and agriculture. The government aims to cultivate at least 100 “digital supply chain leaders” by the end of the decade. At the enterprise level, companies like BYD, Zeekr, and Midea are already demonstrating applied use cases of robotics, autonomous mobile logistics systems, and generative AI.

Competitive Pressure and AI-Driven Innovation

Multinational firms and tech start-ups are feeding this momentum. Israeli firm Cybord, which specializes in AI-powered quality control, is expanding operations in China, citing Chinese factories’ eagerness to adopt machine learning tools that detect counterfeit or defective components. Cybord’s tools are now being integrated into Siemens’ factory management systems — a signal of China’s appetite for smart industrial partnerships.

According to Stanford University data, China installed seven times more industrial robots than the U.S. in 2023, capturing over half of all new global installations. This wave of automation spans multiple sectors, with the auto industry leading in implementation. BYD and Geely have moved decisively, deploying robotics in logistics and manufacturing to reduce labor costs and enhance production speed, while companies like Nio are investing in AI for battery and chip innovation.

Digital Leadership in Global Benchmarking

Karel Eloot of McKinsey highlights that 41% of the world’s most advanced digital manufacturing use cases — as defined by the World Economic Forum’s Global Lighthouse Network — are located in China. This includes not only domestic champions but also foreign multinationals operating inside the country, such as GE Healthcare, AstraZeneca, and Schneider Electric, which are leveraging China-based AI and automation to optimize global supply chains.

These developments signal a critical transition: China is not just the world’s factory; it is becoming the smart factory of the world. Generative AI is enabling faster design iterations, streamlined workflows, and predictive maintenance. Companies like Hisense-Hitachi are using it to minimize inefficiencies in team coordination and increase real-time responsiveness on factory floors.

Supply Chain Fragmentation and AI Inequality

However, this advancement comes with global consequences. While China races ahead in supply chain digitalization, many countries are struggling to keep pace, risking deeper bifurcation in global manufacturing capabilities. Jens Eskelund of the EU Chamber of Commerce warns that China’s push for technological self-sufficiency could trigger countermeasures from key trading partners, especially if access to high-tech markets and data becomes restricted.

Moreover, the sheer intensity of internal competition — marked by rapid price wars and relentless innovation — means that laggards will be quickly sidelined. This “AI arms race” in production processes is already making it harder for smaller or less digitally equipped economies to attract manufacturing investment.

AI is becoming the new strategic advantage in global trade. With robust public and private sector alignment, China is not only defending its manufacturing supremacy amid geopolitical tensions — it is reinventing it. As generative AI and robotics scale across sectors, companies seeking cost-effective, high-quality production will find it increasingly difficult to bypass China. In a world of tariff threats, rising debt, and fragmented trade blocs, China’s bet on digital infrastructure may well define the next chapter of global supply chains.

Source: CNBC

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Economic

Forex

Dollar Pressured by U.S. Economic Slowdown and Tariff Jitters

The greenback continued its downward trajectory, weighed down by deteriorating U.S. economic indicators and sustained concerns over the Trump administration’s unpredictable trade policies. The May ISM services data revealed a contraction for the first time in nearly a year, while private payroll figures from ADP significantly undershot expectations. This combination of sluggish growth and persistent inflation has stoked fears of a “stagflation-lite” scenario, prompting a rally in U.S. Treasuries and sending yields on the 10-year note to a four-week low.

The dollar index, tracking the greenback against six major currencies, fell to 98.749, down about 9% year-to-date and on pace for its worst annual performance since 2017. Demand for safe-haven alternatives such as the yen and euro remained resilient. The dollar slipped slightly to ¥142.80, while the euro hovered near its six-week high at $1.1424. The British pound traded at $1.3557, buoyed by relatively stronger economic data from the UK.

Markets Anticipate Fed Rate Cuts Amid Trump’s Pressure

With mounting signs of economic deceleration, traders have begun pricing in a high probability—95%, according to LSEG data—of a Federal Reserve rate cut by September, totaling 56 basis points in projected easing for 2025. Former President Donald Trump has amplified his criticism of Fed Chair Jerome Powell, demanding swift rate reductions to counteract the economic headwinds triggered partly by his own tariffs. His Truth Social post on Wednesday underscored frustration: “‘Too Late’ Powell must now LOWER THE RATE. He is unbelievable!!!”

The Fed's challenge is delicate: cutting rates could support growth but risks reigniting inflation, particularly if trade tensions continue to distort supply chains and consumer prices.

Trade Uncertainty Deepens Currency Market Volatility

Investor confidence has been undermined by the lack of concrete progress in the U.S.’s trade negotiations, especially with China. While Trump has hinted at a potential direct call with Chinese President Xi Jinping, the lack of clarity and Xi’s perceived reluctance have exacerbated geopolitical uncertainty. Trump’s latest description of Xi as “extremely hard to make a deal with” signals deepening friction just weeks before the self-imposed early July deadline for several trade agreements.

This backdrop has increased hedging activity in foreign exchange markets, with investors rotating into currencies less exposed to trade turmoil. Both the Australian and New Zealand dollars edged higher—up 0.22% and 0.24%, respectively—driven partly by relative commodity market stability and a weaker USD.

ECB Poised to Cut Rates, Euro Steady

While the euro has strengthened in recent sessions, it faces a pivotal test with the European Central Bank widely expected to deliver a 25-basis-point rate cut. This would be the ECB’s eighth reduction in just over a year. The focus, however, is shifting toward the guidance for future moves. With energy prices declining and fiscal stimulus in the pipeline, some analysts, including Nuveen’s Laura Cooper, suggest that the ECB may adopt a wait-and-see posture after Thursday’s cut—unless data justifies further easing.

All eyes are now on Friday’s U.S. non-farm payrolls report, expected to show 130,000 jobs added in May. A weak result could trigger another wave of dollar selling and deepen expectations of aggressive Fed cuts. Conversely, a surprise upside could temporarily steady the greenback, though structural concerns about the U.S. deficit and erratic trade leadership may cap any rebound.

In sum, the interplay between macroeconomic data and geopolitics—particularly Trump’s trade decisions—continues to weigh heavily on the dollar’s outlook and global investor sentiment.

Source: Reuters

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Economic

Diplomatic Response Amid Escalating Pressure

The Ministry of Industry and Trade of Vietnam confirmed on Thursday that it had submitted a formal document to the U.S., addressing recent trade demands. Though the contents remain undisclosed, the ministry emphasized Vietnam’s “determination and goodwill” in seeking mutual understanding and practical solutions. The timing is critical: the Trump administration’s imposition of steep tariffs, although temporarily paused, threatens to destabilize Vietnam’s export-driven economic model if enacted in July.

This development comes as part of intensified diplomatic efforts, following the Trump administration’s ultimatum for negotiating countries to submit their best offers by Wednesday, in anticipation of a rapidly approaching five-week deadline for revised trade deals. These moves mark a strategic push by the White House to finalize multiple bilateral frameworks under accelerated timelines.

Third Negotiation Round Set, Risks Remain High

Vietnamese Trade Minister Nguyen Hong Dien and U.S. Trade Representative Jamieson Greer met in Paris this week to lay the groundwork for the upcoming third round of trade negotiations, scheduled before next weekend. The Vietnamese ministry confirmed that both sides pledged to “focus maximum efforts” on reaching substantial progress during this next round.

The looming 46% tariffs, if enforced, could inflict serious damage on Vietnam’s manufacturing sector, particularly in electronics, textiles, and furniture—industries that are deeply reliant on U.S. market access. While Vietnam has diversified its trade partners in recent years, the U.S. remains its largest export destination, accounting for roughly a quarter of its total exports.

Geopolitical and Economic Stakes

This bilateral trade tension occurs within a broader reshuffling of global supply chains. Amid U.S.-China decoupling, Vietnam has emerged as a key beneficiary of manufacturing relocations. However, this strategic advantage could be reversed if punitive tariffs make Vietnamese goods uncompetitive in the U.S. market.

The Trump administration, under pressure to assert a tougher stance on trade imbalances, views Vietnam’s trade surplus and the undervaluation of the dong as critical issues. Vietnam, for its part, aims to avoid formal currency manipulation designation and preserve its access to the U.S. market through diplomacy and incremental concessions.

The outcome of these talks will serve as a bellwether not only for Vietnam-U.S. trade relations, but also for other emerging market economies caught in the crossfire of shifting American trade policy under Trump’s second term.

If the third round of negotiations yields measurable progress, it may avert the worst-case scenario of full tariff implementation. Vietnam’s swift submission and its cooperative posture suggest willingness to compromise. However, the lack of transparency on the document’s content and the unpredictability of U.S. demands keep the risk environment elevated. Investors, exporters, and policymakers will closely monitor next week’s negotiations for any signs of a breakthrough.

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Economic

Macroeconomic Overview: Growth Without Consumption Support

Australian household spending, which accounts for over half of GDP, continues to underperform in real terms. According to the Australian Bureau of Statistics' new Monthly Household Spending Indicator (MHSI), seasonally adjusted spending rose by only 0.1% in April, following a -0.1% contraction in March. On an annual basis, growth has slowed to 3.7%, a notably weak figure when adjusted for population growth of 1.7%. This indicates near-stagnant per capita consumption, suggesting households remain cautious despite monetary easing.

The spending breakdown shows a stark divergence between goods and services. Goods spending fell by 1.1%, with sharp pullbacks in clothing, footwear, and vehicle purchases. By contrast, services spending rose 1.5%, buoyed by increased outlays on dining, recreational activities, and healthcare.

This bifurcation reflects shifting consumer priorities: Australians appear to be re-engaging with experiences and essential services while continuing to defer larger or discretionary goods purchases. Factors such as wage stagnation, debt overhang from the previous interest rate cycle, and lingering economic uncertainty may be tempering household confidence.

Implications for Monetary Policy and GDP

The Reserve Bank of Australia, which cut interest rates to 3.85% in May, had already revised down its consumption forecast. This April data supports market expectations for further easing as early as July, with futures pricing suggesting a terminal rate near 2.85% by Q1 2026. Given that Q1 GDP only grew by 0.2%, household consumption is failing to deliver the stimulus expected under looser monetary conditions.

The RBA's policy dilemma deepens: while easing is needed to support demand, its effectiveness is being muted by cautious consumer behavior. The tepid household spending also raises concerns about broader economic momentum, especially as external demand remains exposed to global uncertainties.

Outlook and Strategic Considerations

The MHSI will replace the narrower retail sales report starting July, offering a more accurate lens on household consumption patterns. Its broader coverage — 68% of total consumption compared to retail’s ~30% — should sharpen macroeconomic forecasting.

Policymakers, investors, and retailers must now reckon with a slower-than-expected recovery in domestic demand. While services may continue to provide modest tailwinds, the weakness in goods consumption suggests that any rebound in GDP will be gradual and uneven unless households regain confidence.

The data also strengthens the case for targeted fiscal measures to complement monetary policy, such as direct transfers or subsidies that can stimulate marginal spending among lower-income households. Without such intervention, the risk of prolonged demand-side stagnation remains.

Source: Reuters

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Mixed Momentum Amid Weak U.S. Data

After a strong run in global equities, Asian markets began to diverge. Japan’s Nikkei 225 dipped 0.2%, and Australia’s ASX 200 saw a modest 0.1% decline. In contrast, South Korea’s Kospi surged 2.1% on political optimism tied to newly inaugurated President Lee Jae-myung, who pledged renewed diplomacy with North Korea and closer trilateral security ties with the U.S. and Japan. Hong Kong’s Hang Seng rose 0.9%, while Shanghai’s Composite was flat.

This uneven momentum follows a U.S. session in which the S&P 500 held nearly flat and the Dow slipped 0.2%. The Nasdaq managed a 0.3% gain, but the broader market appeared hesitant amid conflicting signals from the economy.

Economic Uncertainty Clouds Investor Confidence

Investor sentiment was rattled by two key economic reports. The ISM’s services index unexpectedly showed contraction, with businesses citing tariff-related uncertainty as a major obstacle to planning. Meanwhile, the ADP employment report revealed slower-than-expected job growth in the private sector, raising concerns ahead of Friday’s official U.S. jobs data. These indicators suggest that the post-COVID U.S. expansion may be encountering friction from policy-related headwinds, especially Trump's tariff regime.

Bond markets reacted sharply: the 10-year Treasury yield slid to 4.35% from 4.46%, while the 2-year yield dropped to 3.86%. This signals growing expectations that the Federal Reserve will need to cut interest rates sooner to counteract weakening fundamentals. President Trump intensified pressure, blasting Fed Chair Jerome Powell for delaying action and urging immediate cuts on his Truth Social account.

Key Support and Resistance Levels

In equity markets, the S&P 500 remains near its record high but lacks momentum to break through resistance at the 6,100 level. Nasdaq's steady rise to 19,460 shows ongoing strength in tech but may face resistance if macro data continues to disappoint. Treasury yields’ downward move signals a short-term reversal from the recent uptrend, particularly as rate cut bets strengthen. Crude oil remains under pressure, with WTI at $62.77 and Brent near $64.87, indicating subdued demand expectations.

Currency markets showed mild fluctuations. The dollar firmed slightly to 142.87 yen, while the euro held steady at $1.1413. These reflect cautious positioning ahead of jobs data and further tariff developments.

Source: AP

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China–U.S. Trade War

Bilateral Disconnect: Trump’s Push for Top-Down Talks Hits a Wall

President Donald Trump's late-night social media tirade underscores his frustration over China's refusal to engage in a high-level conversation. While he sees a direct phone call with President Xi Jinping as a catalyst to resolve U.S.-China trade disputes, Beijing appears to be holding out, likely demanding substantive concessions before agreeing to such contact. This mismatch reveals a core structural divergence: Trump favors personal diplomacy and grand gestures, whereas China emphasizes incremental negotiation at the bureaucratic level, a tradition rooted in its cautious and hierarchical approach to foreign policy.

This divergence is causing a diplomatic impasse. Trump’s preference for leader-to-leader talks may have worked in earlier negotiations, such as during the 2017 Mar-a-Lago summit, but China’s current posture reflects greater strategic restraint. Beijing’s unwillingness to make a symbolic move without material benefit suggests a more confident and risk-averse China than in previous trade standoffs.

What China Wants vs. What Washington Will Not Give

At the center of the deadlock is a clash over core economic interests. China seeks broader access to high-end U.S. chip technology for AI and defense, alongside fewer investment restrictions and expanded agricultural trade. However, any rollback of export controls is politically untenable in Washington, where bipartisan consensus holds China as a national security threat. Trump’s administration is also maintaining strict restrictions on semiconductor exports and engine parts, exacerbating Beijing’s fears of economic containment.

Washington’s broader grievances — including accusations of industrial dumping and intellectual property theft — are longstanding and deeply entrenched. The rare earths controversy illustrates this well: while U.S. officials claim China reneged on a deal to restore rare earth exports, Beijing insists it is merely following standard licensing procedures. The ambiguity reflects a lack of mutual trust and a widening interpretive gap over what each side considers compliance.

Beijing’s Strategic Pivot Toward Europe

Amid the U.S.-China stalemate, China is recalibrating its external trade strategy. Beijing is courting Europe, which is grappling with its own trade conflict with the Trump administration. With EU leaders preparing for a summit in Beijing next month, China is reportedly considering a massive Airbus order, which would both strengthen diplomatic ties with Europe and undercut U.S. aviation giant Boeing.

This tilt away from Washington signals Beijing’s intent to hedge against future U.S. disruptions. China is betting that deeper EU cooperation and economic diversification can shield it from the volatility of U.S. policy shifts. It also underscores a perception that Trump’s unilateralism is alienating both allies and rivals, leaving geopolitical openings for China to exploit.

Legacy of Mistrust and Trump’s Unreliable Deal-Making

A lingering obstacle in this negotiation is Trump's own track record. Even when agreements are struck, such as the 2020 Phase One trade deal, the terms have often fallen dormant or been undermined by subsequent policy moves. According to analysts, Trump’s penchant for aggressive tariffs, abrupt escalations, and personal deal-making creates volatility that few foreign leaders find dependable.

Xi’s hesitancy is not just tactical — it reflects a broader skepticism of the Trump administration’s reliability. Moreover, China feels emboldened by its improved position since the last trade war. With greater resilience, economic diversification, and growing domestic support in the face of U.S. threats, China may be less inclined to compromise under pressure.

A Trade Conflict Without an Exit Ramp

The current U.S.-China standoff reveals more than a temporary breakdown in talks — it reflects a growing structural divergence in strategy, political culture, and global positioning. Trump’s increasingly public frustration only sharpens the perception of U.S. diplomatic isolation, while China plays a longer game, reinforcing ties with Europe and waiting out the storm.

Unless both sides recalibrate — with Washington offering credible incentives and Beijing engaging beyond procedural rigidity — the risk is a further escalation that will not only deepen bilateral decoupling but also fragment global trade alliances. In this game of high-stakes brinkmanship, personal calls and tariffs may no longer be enough to reset relations.

Source: Bloomberg

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The Bank of Canada held interest rates steady for a second consecutive meeting, but officials said there may be a need to cut borrowing costs if the economy weakens and inflation remains contained as US tariffs make an impact.

Officials led by governor Tiff Macklem kept the policy rate at 2.75% on Wednesday, matching expectations of markets and the majority of economists in a Bloomberg survey.

Policymakers said they held borrowing costs steady as they gain more information on US President Donald Trump’s trade conflict, which they called “the biggest headwind facing the Canadian economy” as it slams exports and adds to uncertainties for consumers and businesses.

At the same time, officials said the economy held up stronger than expected in the first quarter, and flagged a recent surge in core inflation measures.

“With uncertainty about US tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, governing council decided to hold the policy rate as we gain more information on US trade policy and its impacts,” policymakers said in a statement.

The loonie rose to a year-to-date high versus the US dollar, trading at C$1.3666 as Macklem spoke in Ottawa. Canadian debt held gains across the curve and tracked US rates, with Canada’s two-year yield down about three basis points to 2.59%.

While policymakers said there was “clear consensus” to pause and wait for more information on how the trade dispute plays out, the bank introduced some limited guidance on where borrowing costs are likely headed.

“On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued US tariffs and uncertainty, and cost pressures on inflation are contained,” Macklem said in his opening remarks, adding that policymakers had a “diversity” of views on the future rate path.

Bank of Canada governor Tiff Macklem (right) and senior deputy governor Carolyn Rogers at the news conference.

Combined, the communications show the central bank is comfortable waiting for clearer signals on how the trade dispute will evolve. At the same time, policymakers are actively discussing resuming monetary easing should the economy deteriorate and inflation remain under control.

A weakening economy for the rest of the year is the base case in a Bloomberg survey of economists, with gross domestic product forecast to contract in the middle two quarters of this year. Inflation is seen averaging around the bank’s 2% target throughout 2025.

“July looks more promising for a quarter-point ease if, as we expect, the jobless rate continues to move higher, and inflation in items not subject to tariff pressures eases off a bit,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors.

A lot of water will pass under the bridge between now and the July 30 decision, Karl Schamotta, chief market strategist at Corpay, told investors. Two retail sales reports, two jobs numbers, two inflation updates, a quarterly consumer and business survey and a number of tariff deadlines are set to land before then, he pointed out.

“If the economy remains surprisingly resilient and price pressures continue to build, rate cuts could be pushed further into the future.”

When the bank paused in April for the first time this easing cycle, it abandoned point estimates for gross domestic product and inflation for the first time since the Covid-19 crisis. Instead, central bankers offered two potential scenarios for the economy. It mentioned neither of these scenarios in the communications on Wednesday.

Macklem told reporters at a news conference that the Canadian economy was somewhere in the middle of the two scenarios, but that the likelihood of the more severe outcome — which had projected a year-long recession in the country — seemed to have been reduced. Senior deputy governor Carolyn Rogers said the bank hopes to offer point forecasts in its July monetary policy report, but some resolution to the uncertainty is needed first.

Trump has applied tariffs on a variety of Canadian goods, including steel, aluminium, autos and products that don’t comply with the North American trade pact. Uncertainty remains elevated as the administration appeals a court ruling that overturned many of his tariffs. That ruling did not apply to his sectoral levies, and Trump signed an order on Tuesday doubling the metals tariffs to 50%.

In the statement, the bank said it would continue to monitor how tariffs reduce demand for Canadian exports and how it affects business investment, employment and household spending. Officials are also watching inflation expectations and how higher tariff costs are passed through.

“The governing council’s press release strikes a dovish tone, and governor Macklem’s opening statement indicates policymakers see risks skewed towards additional rate cuts this year. We also expect the Bank of Canada to resume rate cuts, likely as soon as the third quarter — once policymakers have weaker GDP growth and core inflation data in hand,” says Stuart Paul, US and Canada economist at Bloomberg Economics.

Macklem said it was “still too soon to see the direct effects of retaliatory tariffs in consumer price data,” referring to the levies Prime Minister Mark Carney has levied on imports of some US goods, and which are currently tallying well below the total C$20 billion (RM61.82 billion) the federal government is expecting.

Core inflation measures surged to 3.2% in April, the highest in more than a year. While Macklem repeated that the bank is seeing “some unusual volatility” in core gauges, he also said the measures “suggest underlying inflation could be firmer than we thought.” Higher food prices, brought on by trade disruption, may be partially responsible, the bank said.

It’s clear the Bank of Canada is more focused on inflation at the moment than the weakening economy, Charles St-Arnaud, chief economist at Alberta Central, said on BNN Bloomberg Television.

“I’m wondering how much of that is also influenced by their experience over the past two years. I’m sure they still have some PTSD from the sharp inflation increase in 2022,” St-Arnaud said.

At 2.75%, the benchmark overnight rate is at the midpoint of officials’ estimate for the neutral range, where policymakers believe borrowing costs are neither stimulative nor restrictive.